Ordinary and necessary business expenses are the costs of running your trade or business that Section 162 of the Internal Revenue Code lets you subtract from gross income.1Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses To qualify, an expense has to be both ordinary (common and accepted in your line of work) and necessary (helpful and appropriate for the business).2Internal Revenue Service. Ordinary and Necessary Business Expenses Both tests apply at the same time, and a handful of expense categories carry extra limits or are barred outright regardless of how well they fit the definition.
What Ordinary Means
An ordinary expense is one that is common and accepted in your particular industry. It doesn’t have to recur. A freelance photographer replacing a stolen lens is incurring something other photographers would recognize as routine, even if it happens once in a career. The question isn’t frequency; it’s whether people in the same trade would look at the expense and say it makes sense.
If no one in your industry would recognize the cost as normal, expect pushback. A landscaping company deducting scuba gear would have a hard time defending that as ordinary, unless it specialized in underwater planting and could prove it.
What Necessary Means
A necessary expense is one that is helpful and appropriate for your trade or business. The bar is lower than most people expect. The expense doesn’t need to be essential or indispensable. A second phone line dedicated to client calls is necessary even though you could technically use your personal phone.
An expense common in your industry but with no business purpose fails. An expense that clearly helps your business but is unheard-of in the trade also fails. Most routine operating costs pass both tests without any trouble; disputes tend to cluster around costs that blur the line between personal benefit and business use.
Common Deductible Expenses
Most of what keeps a business running day to day qualifies. The categories the IRS sees most often:
- Wages, salaries, bonuses, and commissions paid to employees, as long as the amounts are reasonable for the services performed. S corporation shareholders who work in the business must pay themselves a reasonable salary before taking distributions; the IRS can reclassify distributions as wages if compensation is too low.3Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
- Rent for office space, equipment, warehouses, or other business property.
- Utilities at business locations: electricity, gas, water, internet, and phone service.
- Advertising, website expenses, and promotional materials.
- Insurance premiums for liability coverage, property insurance, and employee health plans.
- Supplies consumed in normal operations, from printer paper to cleaning products.
- Professional fees paid to accountants, attorneys, and consultants for business work.
The list isn’t exhaustive. Any legitimate cost of doing business can qualify if it clears the ordinary-and-necessary bar and you can document it.
Expenses With Extra Rules
Several categories that otherwise qualify come with caps or conditions that catch business owners off guard.
Business Meals
Food and beverages with a business purpose are deductible at 50 percent of the cost.4Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses You or an employee must be present at the meal, and the meal cannot be lavish. Keep a record of who attended, the topic discussed, and the amount.5Internal Revenue Service. About Business Travel Expenses
Entertainment
Entertainment expenses are completely non-deductible. Taking a client to a sporting event, concert, or golf course is out, regardless of how much business you discuss.4Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses Dues for social, athletic, or recreational clubs are also non-deductible. If you buy a meal at an entertainment event and it’s invoiced separately from the entertainment, the meal portion can still qualify for the 50 percent deduction.
Vehicle Expenses
If you use a car, van, or truck for business, you can deduct vehicle costs using one of two methods. The standard mileage rate for 2026 is 72.5 cents per mile.6Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile The alternative is the actual expense method: track fuel, insurance, repairs, tires, registration, and depreciation, then deduct the business-use percentage.7Internal Revenue Service. Topic No. 510, Business Use of Car
If you own the vehicle, you have to choose the standard mileage rate in the first year the car is available for business use, or you’re locked into actual expenses for that vehicle. If you lease, whichever method you pick applies for the entire lease period. Commuting between home and your regular office doesn’t count either way.
Home Office
You can deduct expenses for the business use of your home only if the space is used exclusively and regularly as your principal place of business.8Internal Revenue Service. Topic No. 509, Business Use of Home A desk in a bedroom that doubles as a guest room doesn’t qualify. Two calculation methods are available: the regular method (actual expenses like mortgage interest, utilities, insurance, and repairs, allocated by the percentage of the home used for business) or the simplified method at $5 per square foot up to 300 square feet, capping the deduction at $1,500.9Internal Revenue Service. Simplified Option for Home Office Deduction
Equipment and Section 179
Buying equipment, furniture, software, or other tangible property normally means depreciating the cost over several years. Section 179 lets you deduct the full purchase price in the year the asset is placed in service, up to $2,560,000 for tax years beginning in 2026.10Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets That limit phases out dollar-for-dollar once qualifying purchases exceed $4,090,000 for the year. The deduction also can’t exceed your taxable income from the active conduct of a trade or business; any excess carries forward.
For smaller purchases, the de minimis safe harbor under the tangible property regulations lets you deduct items costing $2,500 or less per invoice, or $5,000 if your business has audited financial statements.11Internal Revenue Service. Tangible Property Final Regulations Most small businesses handle laptops, office chairs, and small tools this way without dealing with depreciation schedules.
What You Cannot Deduct
Some spending looks business-related but is barred. Claiming these can trigger penalties on top of losing the deduction.
Personal Expenses
Personal, living, and family expenses aren’t deductible, even if you pay them from a business account.12Internal Revenue Service. Income and Expenses Running groceries through a business credit card doesn’t convert them into a business expense. Where a cost has both business and personal components, like a cell phone used for both, deduct only the business percentage.
Capital Expenditures
Costs that improve property, adapt it to a new use, or extend its useful life can’t be written off all at once. They’re added to the asset’s basis and recovered through depreciation.13Internal Revenue Service. Topic No. 704, Depreciation Replacing an office roof is a capital expenditure; patching shingles is a deductible repair. The line between repairs and improvements is one of the most frequently litigated areas of business tax, so document your reasoning.11Internal Revenue Service. Tangible Property Final Regulations
Fines and Penalties
Any amount paid to a government, or at a government’s direction, because of a law violation or investigation of one is non-deductible. That covers everything from parking tickets to multimillion-dollar regulatory settlements. A narrow exception exists for amounts specifically identified in a court order or settlement agreement as restitution or compliance costs, and the taxpayer carries the burden of proof.
Lobbying and Political Spending
Costs of influencing legislation, participating in political campaigns, swaying public opinion on elections or referendums, or communicating with executive branch officials to influence their official actions are all non-deductible. Research and planning for those activities gets the same treatment. There’s a small exception for in-house lobbying under $2,000 per year, but the threshold is low enough that it rarely matters.
Start-Up Costs Are Handled Separately
Expenses you incur before your business opens — market research, scouting locations, training employees, legal fees for forming the entity — are start-up costs, and Section 162 doesn’t apply to them the same way. You can immediately deduct up to $5,000 of start-up costs in the year the business begins active operations. If total start-up costs exceed $50,000, that $5,000 allowance shrinks dollar-for-dollar and disappears at $55,000.14eCFR. 26 CFR 1.195-1 – Election to Amortize Start-Up Expenditures Anything above the immediate deduction gets amortized evenly over 180 months, starting the month you open.
Organizational costs, meaning the fees for creating the entity itself (state filing fees, drafting partnership or operating agreements), follow an identical structure: up to $5,000 immediate, same $50,000 phase-out, same 180-month amortization for the balance. A new business can potentially write off $10,000 of combined start-up and organizational costs in year one.
When the IRS Treats the Activity as a Hobby
If the IRS decides your activity isn’t engaged in for profit, Section 162 deductions go away entirely.15Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit This matters most for side ventures, creative work, and activities that resemble hobbies.
The safe harbor: if the activity shows a profit in at least three of the last five consecutive tax years, the law presumes you’re operating for profit. Falling short doesn’t automatically make it a hobby; it just shifts the burden to you to show a genuine profit motive. The IRS weighs nine factors from Treasury regulations, including how businesslike your operations are, the time and effort you invest, your track record of income and losses, whether you’ve sought expert advice, and whether the activity involves significant personal pleasure.16Internal Revenue Service. Activities Not Engaged in for Profit Audit Technique Guide No single factor is decisive. If you’re running persistent losses on something you clearly enjoy, expect scrutiny. Detailed books, a separate bank account, and a written business plan support your position.
Records You Need
The IRS won’t take your word for a deduction. Every expense needs records showing the payee, the amount, the date, and the business purpose. Receipts, invoices, canceled checks, credit card statements, and account records all qualify.17Internal Revenue Service. What Kind of Records Should I Keep
Travel and meals face a higher standard. You need the amount, the date, the location, and the specific business purpose or the relationship of the people involved.18Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses “Client dinner” scrawled on a receipt won’t hold up. Write down who you met and what you discussed, ideally the same day.
Keep business tax records at least three years from the filing date. If you underreport income by more than 25 percent, the IRS has six years to audit, so hold those records longer. For deductions tied to worthless securities or bad debts, the retention period is seven years.19Internal Revenue Service. How Long Should I Keep Records When in doubt, keep everything. Storage is cheap; reconstructing records mid-audit isn’t.